financials

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This ratio is similar in spirit to the PE ratio, but it relates the value of all the operating assets (the enterprise value) to a measure of the operating cash flow generated by those assets (EBITDA).

This completes our definition of some common ratios. We could tell you about more of them, but these are enough for now. We’ll leave it here and go on to discuss some ways of using these ratios instead of just how to calculate them. Table 3.5 summarizes the ratios we’ve discussed. Table 3.6 provides some information for the well-known home supply stores Lowe’s and Home Depot for their fiscal years ending in 2011. As you can see, Home Depot has a slightly higher current ratio, debt-equity ratio, and total asset turnover. Home Depot also has higher profitability ratios. Because of its increased use of leverage and better profitability, Home Depot has a higher ROE, something we will discuss in the next section.

TABLE 3.5 Common financial ratios

The price-earnings ratio is similar for Lowe’s and Home Depot, although Home Depot’s market-to-book ratio is almost twice as large as Lowe’s. Overall, Home Depot appears to be performing better than Lowe’s based on this abbreviated financial analysis. Of course, if we really want to examine these two companies, we would want to look at more ratios than the ones presented here.

CONCEPT QUESTIONS

3.2a What are the five groups of ratios? Give tw o or three examples of each kind.